How the Magic Circle Lost the Battle for New York
Despite decades of effort and millions of dollars spent, the U.K.'s Magic Circle firms still haven't made a dent in the New York market.
Clifford Chance, which in the fiscal year ended April 30, 2013, generated revenues in the Americas of $225.7 million—11 percent of its total firmwide revenue of £1.27 billion ($1.99 billion)—is a recognized market leader in aviation finance and REITs, achieving top directory rankings in both areas. The firm also has a strong, 22-lawyer U.S. project finance team, with Americas practice cochair Christopher McIsaac the only Magic Circle projects partner ranked in the first band by Chambers.
A&O also scores well, matching Clifford Chance in its number of both firm and lawyer rankings in Chambers. The firm possesses a leading public-private partnerships group—one of only three Magic Circle practices with a tier-one ranking in Chambers. U.S. senior partner O'Shea—ranked in the second band by Chambers for real estate finance—has developed a niche advising hedge funds on distressed property deals, while Pamela Chepiga is highly regarded for both commercial litigation and white-collar criminal investigations.
Linklaters, meanwhile, features in Chambers in only four practice areas, three of which are in the bottom band, and is the only U.K. firm to have no leading or top-tier lawyers in either Chambers or the U.S. Legal 500. Linklaters is the sole Magic Circle firm to be ranked by Chambers for U.S. banking and finance, however—a surprise, given that it is better known globally as a corporate firm, as opposed to the more finance-centered A&O and Clifford Chance. The firm also has the strongest funds practice of any U.K. firm in the U.S., according to Chambers, although that department suffered a blow last year with the departure of U.S. hedge funds leader Stephen Culhane, who joined Kaye Scholer.
"We're not going to judge success by head count—we're not trying to build a U.S. law firm," says Linklaters U.S. co–managing partner Jeff Norton, who adds that the revenue generated by the firm's U.S. offices has increased annually throughout the recession. "We could build domestic practices and penetrate some of those markets, but if it doesn't align with our global strategy, what's the point?"
Among the Magic Circle firms, Freshfields has arguably adapted to the American market most successfully. Its practice mix most closely resembles that of a U.S. firm, with a 16-partner, 80-lawyer litigation and disputes group accounting for more than 50 percent of its business in the States. That is twice the proportion of litigators in Freshfields's London headquarters, where 25 percent of partners are litigators, and three times bigger than the litigation arms of the U.S. offices of A&O, Clifford Chance, or Linklaters, each of which has fewer than 20 percent of their attorneys in disputes.
As it is elsewhere in the world, Freshfields is a recognized market leader in the U.S. for international arbitration, achieving top-tier rankings in both Chambers and the U.S. Legal 500—one of just two Magic Circle practices to do so, alongside Clifford Chance's REITs team. The firm has also been perhaps the clearest and most consistent in its strategy. So while the other Magic Circle firms have grown or contracted over time—Clifford Chance had 450 attorneys in the U.S. immediately following its combination with Rogers & Wells but just 230 today, for example—Freshfields has been stable. Just one partner has left the firm in the U.S. so far in 2013: Washington, D.C.–based tax partner Gregory May, who retired. You'd have to go back over a year for the last time Freshfields lost a U.S. partner to a rival, when projects specialists Kent Rowey and Dolly Mirchandani moved to A&O. Only five other partners have left the firm in either New York or Washington, D.C., over the past seven years.
It could be said that Freshfields has been too cautious, however. Its New York office is by far the smallest of the Magic Circle, with just 120 attorneys, and as a result it lacks a profile outside litigation and disputes. Julian Pritchard, U.S. regional managing partner at Freshfields, acknowledges that the firm may have been too circumspect in its approach to America, but says that the risks associated with more aggressive investment outweigh the potential rewards. "We could have grown more quickly in the early days, but felt that quality should be the guiding principle," he says. "If being cautious has cost us some market share, that's a price we're willing to pay."
While each of the four international Magic Circle firms has gained traction in certain practice areas in the U.S., they are nowhere to be seen when it comes to M&A. The four do not feature at all in the top U.S. M&A categories in either Chambers or The Legal 500, and it's a similar story with deal data. As of late September, each of the firms sit outside the top 20 in Mergermarket's 2013 M&A adviser rankings by aggregate deal value on transactions with a U.S.–based target. Linklaters languishes in 70th place.
The U.K. firms are simply not in the running for large U.S. public company M&A deals, and still typically have to team up with American firms on global transactions with U.S. components. Freshfields recently worked alongside Munger, Tolles & Olson in advising Warren Buffett's Berkshire Hathaway Inc. on its $28 billion acquisition, with 3G Capital Inc., of U.S. food processing giant Heinz Company—the second-largest U.S. M&A deal of the year so far. Similarly, Clifford Chance paired with Simpson Thacher & Bartlett to represent private equity firm Silver Lake Partners on the $24.4 billion (£15.5 billion) buyout of computer manufacturer Dell Inc.—the largest leveraged buyout since the beginning of the financial crisis in 2008.
Clifford Chance's Cohen says the firm wants to get to the point where it doesn't have to partner with U.S. rivals, but there are two significant barriers to it and the other Magic Circle firms achieving that goal: scale and client relationships. Major M&A deals require significant lawyer resources—not just attorneys practicing in corporate law, but also in specialist support areas, such as tax, labor and employment, environmental law, antitrust, IP, real estate, finance, and securities. "If you're going to do huge public M&A [deals], you can't just take a few people—you need a large, fully formed team, which is a serious commitment," Freshfields's Pritchard says. "That makes building M&A more challenging—it takes a concerted effort."